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Getting it right: deeds and indemnity and directors and officers insurance

Officers who want the most comprehensive protection should insist upon a deed of indemnity.

Directors and officers are subject to numerous legal duties and obligations. Navigating this legal maze is often not a straightforward process for even the most diligent officers. Officers who breach their duties are at risk of being held personally liable. There are essentially three ways of mitigating the risk:

meticulous care and attention to duties (goes without saying);

deeds of access and indemnity from the Company (subject to legal constraints and capacity to pay); and

insurance.

In light of the recent case of Leckenby v Note Printing Australia Limited [2014] VSC 538, it is more important than ever that officers are aware of their rights and obligations if a claim is made against them. It is vital that officers maximise the protection afforded to them by a company deed of indemnity and have an understanding of the cover provided to them under the company directors and officers insurance policy.

Leckenby v Note Printing Australia Limited

The Supreme Court of Victoria considered whether Mr Leckenby had a right to be indemnified by Note Printing Australia (NPAL), in respect of his ongoing legal costs of defending a criminal proceeding, both during the interlocutory and trial stages and prior to any verdict of the jury as to his guilt or innocence. Mr Leckenby was charged with conspiring to bribe foreign officials, in order to secure bank note printing contracts for the benefit of NPAL.

The limit of liability under NPAL's directors and officers policy was insufficient to meet the costs of Mr Leckenby’s criminal proceedings.

Relevantly, the deed of indemnity provided:

"To the fullest extent permitted by law, NPAL hereby indemnifies the Officer against each and every liability for legal costs and expense the Officer may incur or for which the Officer may become liable in defending an action for a liability incurred as such an officer of NPAL unless such costs and expenses are incurred ... in defending or resisting criminal proceedings in which the Officer is found guilty".

The deed of indemnity also provided that if it is established in relation to a claim that the Officer is not entitled to be indemnified under the deed then the Officer must refund to NPAL all amounts incurred by NPAL under the Deed in respect of that claim within 30 days.

NPAL asserted that if Mr Leckenby was entitled to be indemnified under the deed of indemnity, then that entitlement, and the right to payment, did not arise unless and until the criminal proceedings had come to an end (including any appeals) and there had been a not guilty verdict against him.

Justice Sifris considered the terms of the deed of indemnity and the relevant legislation and made the following observations:

It was clearly the intention of the parties that NPAL provide funding prior to verdict. This was clear from a reading of the deed of indemnity as a whole and, in particular, clauses 2.3, 2.4 and 6.2(a).

Although the Corporations Act 2001 (Cth) precluded the giving of an indemnity in the circumstances under consideration, from a consideration of sections 199A(3) and 212 of the Corporations Act, together with the words in the Explanatory Memorandum, it was clear that the legislature was concerned to ensure that an officer could, under certain circumstances, receive payments of defence costs in advance of criminal proceedings being finalised and a verdict returned.

The payment able to be made prior to verdict could be a loan, an advance or "otherwise".

Section 199A (3)(b) of the Corporations Act clearly prevented NPAL from indemnifying Leckenby against legal costs incurred by him if he was found guilty.

The usual concept of indemnity is to hold someone harmless or make good a loss which a person has suffered.

Section 199A(3) is only directed to indemnification. It says nothing of payments made prior to verdict. It is a matter of assumption, to conclude that such payments cannot be made even though the trigger for the prohibition (a guilty verdict) has not arrived or indeed may never arrive.

The prohibition in section 199A(3)(b) does not “bite” before the verdict of guilty.

Justice Sifris held that Mr Leckenby was entitled to indemnity in accordance with the terms of the deed of indemnity.

Takeaway points

Officers who want the most comprehensive protection should insist upon a deed of indemnity, in addition to the protection offered by the company constitution and any directors and officers insurance. The terms should provide for both liability indemnification and advancement of defence costs, to the full extent permitted by law, and for the ongoing maintenance of Directors and Officers Liability insurance.

In considering the extent of the protection afforded by a deed of indemnity, relevant issues to consider include:

Will my legal costs be paid on my behalf, or will I have to pay them myself and seek reimbursement?

Will I be able to choose my own lawyers?

Is there a limit on the amount payable and, if so, is it likely to be enough?

Am I covered for preliminary costs associated with a regulatory investigation?

What types of liabilities will be covered by the indemnity (e.g. are civil, pecuniary penalties covered as well as liability for damages and compensation)?

What are the restrictions on indemnification?

What happens if the company is acquired, merged or goes out of business?

Compare jurisdictions: Corporate Governance

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